Late last month, Maryland Attorney General (AG) Douglas F. Gansler issued a warning for consumers interested in using virtual currencies such as Bitcoin. Many consumers like virtual currencies because of lower transaction fees compared to banks and traditional payment options.
AG Gansler said in a press release:
"Virtual currency, which includes digital and crypto-currency, is gaining in popularity and controversy. Growing numbers of merchants, businesses and other organizations now accept Bitcoin, one example of crypto-currency, in lieu of traditional currency.
Virtual currencies exist with little to no regulation and there is no safety net, such as federally-backed insurance, if you lose your hard-earned money," said Attorney General Gansler. "It pays to know what's in your e-Wallet and the many ways your money can disappear if you're not careful. Unlike the dollar, these highly volatile alternatives are not issued by a government authority and are typically not backed by tangible assets."
Mark Kaufman, the Maryland Commissioner of Financial Regulation said:
"Bitcoin and all virtual currencies have inherent risks that Marylanders should consider prior to transacting with or investing in these currencies... The entities that accept and transmit, or exchange virtual currencies for U.S. dollars are subject to federal law, and may be subject to state law, including the requirement to be licensed as a money transmitter. It is important to note however, that Maryland does not currently regulate virtual currencies. I encourage any Maryland resident interested in virtual currencies, to do their homework first."
Accounts with virtual currencies are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank accounts up to $250,000.The Internal Revenue Service (IRS) has issued some guidance on the tax status of virtual currencies.
Residents of Connecticut can download the "What's In Your E-Wallet?" alert by the Department of Banking (Adobe PDF). The State Of Washington's Department of Financial Institutions issued a similar warning for consumers:
"One of the major risks of holding virtual currencies is their volatility. Their value can rise or fall substantially over a short period of time... Bitcoins, and others like it, are basically lines of computer code that are valued by the marketplace with no governmental support or oversight. Anyone holding virtual currencies should understand that they could lose a significant part of their investment as the market changes... There are no deposit guarantees like FDIC insurance to protect customer funds held by virtual currency exchanges. Once the funds are gone, there is no way to retrieve them... Some exchange companies that offer to store the consumer’s virtual currencies in virtual wallets have been unable to protect them... Because virtual currencies provide some anonymity, criminal elements have found them useful for money laundering and other crimes. When exchanges are shut down as a result of either knowingly or unknowingly facilitating a crime, customers may have difficulty accessing their funds."
Earlier this month, the U.S. Securities and Exchange Issued an alert about Bitcoin and other virtual currencies.
So, the old saying apples: do your homework first. Wise consumers should first check the financial laws in their state to see what regulations and protections exist, if any.